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The Indian automotive industry accounts for over 7% of the
country's GDP and 22% of its manufacturing GDP. The auto sector is
also one of the biggest recipients of foreign direct investment
(FDI) as it received USD24.2 billion between April 2000 and March
2020. The signs of a slowdown first began to emerge back in 2018,
rationalising the dip in sales by attributing it to a weak festive
season demand. Additionally, to curb pollution, the Supreme Court
of India ruled that automakers have to upgrade from Bharat Stage-IV
(BS-IV) engines to BS-VI engines, forcing many companies to heavily
invest in and change production processes to accommodate the new
change by April 2020. This led to a huge unsold inventory of old
models, thus burdening and stressing the production facilities. And
then, the final blow - COVID-19. With a nationwide lockdown in
place, automakers were forced to fully shut down production
facilities during April and May. According to the president of
Society of Indian Automobile Manufacturers (SIAM), the industry
lost around INR23 billion every day because of plant closures.
Increased demand, government spending, and new policy
will fuel the sector's recovery
India's top automakers' profit and revenue grew by double digits
during the December quarter in a sharp turnaround from the June
quarter, when the nationwide lockdown hit sales and factory
operations.
Maruti Suzuki India Ltd. (INE585B01010) posted a 24%
year-over-year (y/y) rise in net profit for the December quarter on
the back of a 13% y/y growth in revenue. Mahindra & Mahindra
Ltd.'s (INE101A01026) profits also surged 252% y/y, while revenue
grew 11.29% quarter on quarter (q/q). Tata Motors Ltd.
(INE155A01022) reported a 35% y/y increase in revenue for its India
business, while losses narrowed by 38% y/y thanks to higher sales
of passenger and commercial vehicles and pent-up demand owing to
the strict lockdown in April and May.
In the case of two-wheelers, Hero MotoCorp Ltd. (INE158A01026)
posted a 23% y/y increase in profit while revenues jumped 39.7%
y/y. Bajaj Auto Ltd. (INE917I01010) also exceeded expectations by
posting a 23.4% rise in profit as a result of a 16.6% increase in
revenue.
Researchers and analysts foresee increased demand in urban/rural
areas driven by faster rural recovery, increased government
spending, and the introduction of the vehicle scrappage policy as
potential key factors driving sector turnaround in the future.
Scrapping older vehicles will create demand for new vehicles and a
proposed green tax on vehicles will add pressure on fleet owners to
replace their old trucks. Companies such as Mahindra & Mahindra
Ltd. and Maruti Suzuki India Ltd. have already invested in
facilities to recycle vehicles.
What's ahead in 2021?
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